CarLoan #Novate #PersonalFinance
Hey there! 🚗💸 Let’s break down what people mean when they talk about it being cheaper to novate or get a car loan.
So, ELI5 (Explain Like I’m 5): Novating or getting a car loan basically means spreading out the cost of a new car over time instead of paying for it all at once. Here’s how it works:
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Novating: This is where your employer essentially "rents" a car for you and deducts the lease payments from your pre-tax salary. It can seem like a good deal because you’re using pre-tax money, which means you pay less tax. But it’s not always the best option for everyone, especially if you’re not in a high tax bracket.
- Car Loan: A car loan involves borrowing money to buy a car and then paying it back over a certain period, typically with interest. While it may seem like a more straightforward option, it’s important to consider the interest rates and total cost over time.
Now, let’s address your specific scenario of someone making $100k a year and looking to buy a $60k car in their late 20s. How do they justify this expense, especially when trying to save for a house deposit? Here are a few things to consider:
- Calculate the total cost over time, including interest, maintenance, insurance, and depreciation.
- Compare this with the cost of keeping and maintaining an older car.
- Think about your long-term financial goals and priorities.
Ultimately, the decision to novate or get a car loan depends on your individual circumstances and financial situation. It’s essential to do the math and weigh the pros and cons before committing to a big purchase like a new car.
Hope this helps shed some light on the topic! 🌟 Let me know if you have any other questions or need more information. Drive safe and drive smart! 🚗💡
It isn’t always, but it can be depending on individual circumstances. You already covered it in your post really.
It can be beneficial if you are in the top tax bracket and are buying a car >$100k.
Lease payment, running cost are pre tax. No GST. Balloon payment after 3/5 years and it can actually be cheaper than purchasing outright.
Perpetual roll over leases with a new car every 3/5 years is just throwing money away on a perpetual car payment that never ends and you never own a vehicle outright.
3/5 year leases and a balloon payment (paid outright, no finance) and keeping the vehicle for quite a few years post lease after can work really well.
Plug it into a calculator. But the basic rule is leasing a $60k car over 5 years is going to cost you a lot more than $60k in the end.
How do they justify it? By not actually looking at the total cost.
Here’s the output of a quick calculator at lease plan.
Salary $100k
New car cost $60k
Annual KMs 15000
Monthly cost $1373 X 60 months is $82,380
Oh and at the end you have to pay an additional $16,500 to own the car.
So the $60k car actually cost a smidge under $99,000
If it all possible it’s far better to have a cheap car, then put $1373 into a HISA each month and in 4 years buy the $60k car with cash.
Just dont do it!
I’ve read online done calculators have gotten quotes from companies… I understand why people can say it’s bad but I don’t think its as terrible as what people say…
I think you have to take into account that you’re going to buy the car no matter what… cash or personal loan. Not if it’s a good choice or bad choice to spend a lot on a car.
Say you’re on 100k a year, and no matter what you are going to buy a 35k-40k car and drive 10-20k km.
If I use a novated lease with the amount I’d save on the pre tax part will cover my interest and I’ll end up spending in the end the same amount as the car cost. If I use the personal loan I’d be having to pay interest and if I use cash well then I’m using cash and I’ll deplete all my funds.
First rule that id say is that you need to have the residuals sitting in another account earning interest waiting for the final payment. If you don’t have the residual saved up then you’re setting yourself up for a disaster
Edit: this is for a ICE so not a an EV
The savings come with a novated lease on a phev or ev. This is where the deal might make financial sense
do the maths comparing leasing a $60k car vs buying a $60k car.
Then compare it to buying a $15k and tell me what’s cheaper?
There are extremely small number of reasons why you should spend so much money in a car for financial reasons. And the non financial reasons are pretty small as well.
1/. You need a new car
2/. You don’t pay tax on EVs
3/. The money you pay in interest is deductible vs your offset which is not so you dump the money there
4/. You claim GST.
Unfortunately a lot of the novated lease companies get you on 13% interest plus fees making the tax benefits not stack up.
It’s an easy way to get a new car. Financially not a great idea, new cars are always a bad idea u less you’re paying cash.
EV and PHEV are current exempt from fringe benefit tax, which is 20% buying a regular car via novated lease isn’t really great as you loose a big chunk of the saving there.
Obviously the benefit increases the higher your tax bracket. If you are earning 230k+, you’ve got a decent chunk of income in the 45%, even with a ICE vehicle you’ll be getting an immediate 25% reduction. Then you compare the costs to buying the same vehicle outright or via loan and its probably quite beneficial.
With EV, and therefore no FBT, it becomes possible for it to be cost comparable to even your old banger.
Work out your predicted running costs for your current car, including all fuel, insurances, rego, expected maintenance etc.
Get lease quote, the important bit is the repayment fee and management cost, as everything else is flexible and based on your real costs.
For me a 50k PHEV works out at post-tax equivalent of $700p/m inclusive. Considering fuel/insurance/rego is about $600p/m on my old vehicle, it’s really a fairly minor upgrade while paying for a new car compared to an ever increasingly more risky one. Over the duration of the lease it’s quite possible (with vehicle resale value) I could actually come out ahead.
With the tax bracket restructure it’ll be slightly harder to make this work, 30% tax bracket will be borderline in my opinion. If you drive a lot of KM it can definitely work out with any income, as you save the 30% on your very high fuel bill.
They mean they’d rather pay a lease company instead of the ATO.
I earn decent money and I was worse off when I crunched the numbers, despite the bullshit claims of savings because of no GST on car purchase etc
Edit: if you earn 100k and are saving for a home you CAN’T justify a 60k car
I was surprised they approved me for a very large upper limit quickly and easily, it’s quite exy each pay cycle though and not much is before-tax. It’s nice not having to budget for petrol or rego or anything and it’s pretty flexible (eg if you have a 10k km per year limit, you can go over it and it’s averaged over the whole term).
Must be top tax bracket (after sacrifice and all deductions) and must be EV. Often, the middle man scrapes all the saving in the form of a high rental rate.
It’s popular because it’s marketed in a way that works with Australians: save on tax. Just like investment properties etc.
Saved me about $7k on a 1 year lease. But if you consider the sum of money sitting in offset or high interest it’s 2-4k scrapped off that.
Sold petrol car (owned outright, but was originally leased). Leased an ev. New car is better in every way.
Pay almost nothing for fuel ($20/mo, was $250/mo). Pay no GST or FBT. Insurance, rego, servicing, tyres all included (easily $2k/yr previously).
Fuel savings and proceeds from petrol car sale cover lease payments for almost 4 years. All running costs included. Everything is pretax.
Petrol car would cost thousands more to keep for those 4 years, out of taxed income.
Residual at the end, still out in front by a country mile (if I choose to keep it).
The lease companies push how much you save. Make sure you push back and ask what interest rate they are charging. This can often diminish any savings significantly.
For those wanting to buy a house, remember, it is still a loan, and most likely there is going to be a balloon payment at the end of the lease. It’s not magic and is still a financial commitment.
And if you work for a NFP the payments are less too.